1. In order to grant tax relief to the taxpayers of certain areas of the province of Khyber Pakhtunkhwa, FATA and PATA, whose business suffered on account of internal strife, the government in June, 2010 invoked the provisions of Section 53 of the Income Tax Ordinance, 2001 (hereinafter referred as the Ordinance) under which exemptions or concessions are granted on such incomes or to such persons that are listed in the Second Schedule to the Ordinance. Consequently, Clause 126F was inserted in Part I of the Second Schedule which reads “Profits and gains derived by a taxpayer located in the most affected and moderately affected areas of Khyber Pakhtunkhwa, FATA and PATA for a period of three years starting from the tax year 2010”. Thus by virtue of Clause 126F, all profits and gains derived by the taxpayers located in the affected areas stood exempt from income tax for a period of three years.
2. One of the petitioners is a private limited company whereas the remaining two are public limited companies, not listed on the Stock Exchange. They have their business establishments either in Lahore or Multan. As they derive income from executing construction contracts, their business activity, by virtue of Section 153(1) (c) and 153(3) read with Section 169(b) of the Ordinance falls within the domain of ‘final tax regime’. Hence the amount deducted at the rate specified in the First Schedule of the Ordinance from the payments made to them towards fulfillment of their contractual obligations are to be treated as their final tax liability. Accordingly, the petitioners submitted their income tax statements under Section 115 of the Ordinance for each of the tax years 2010, 2011 & 2012 disclosing the deductions made from the payments received against their respective contracts performed in the affected areas. Later it occurred to the petitioners that they were entitled to claim exemption on such payments in terms of Clause 126F, so they applied to the Commissioner for refund of the amounts deducted towards their income tax liability. They initially succeeded in obtaining refund, however, the Additional Commissioner, Inland Revenue issued show cause notices to the petitioners under Section 122(5A) of the Ordinance, proposing to disallow the exemption that was allowed earlier by the Commissioner. After hearing the matter, the Additional Commissioner held that as the petitioners fall within the domain of ‘final tax regime’ and not under ‘normal tax regime’, the exemption granted under Clause 126F was not intended for them. This decision was challenged in appeal before the Commissioner Inland Revenue (Appeals-II), Lahore. After his decision in appeal, the aggrieved party assailed the appellate orders before the Appellate Tribunal, Inland Revenue, which held that the petitioners were entitled for exemption. The tax department then filed References before the Lahore High Court which vide impugned judgments reversed the findings of the Tribunal after holding that the petitioners fall within the domain of ‘final tax regime’ whereas the term ‘profits and gains’ occurring in Clause 126F was relatable to such taxpayers only who fall within the domain of ‘normal tax regime’, hence not entitled to claim exemption. Feeling aggrieved by such decision the petitioners have preferred these petitions for leave to appeal.
3. Mr. Muhammad Akram Sheikh, learned counsel for the petitioners in CPLA Nos. 3366 & 3517 to 3519 of 2016 submitted that the provisions of Section 153(1)(c) and Section 153(3) of the Ordinance are attracted to the case of the petitioners whereby they in each tax year are required to furnish a statement of their income to the Commissioner under Section 115 of the Ordinance and are not obliged to furnish return of income as provided in Section 114 of the Ordinance. He then submitted that irrespective of the fact that petitioners business concerns are located outside the affected areas, as they have executed construction contracts in the affected areas during the exempt years, they were entitled for exemption under Clause 126F. He submitted that accordingly the petitioners furnished a revised statement with the Commissioner under Section 115(4) of the Ordinance and sought refund of the tax deducted at source by the contract awarding entity by invoking Section 170 of the Ordinance. In support of his argument, the counsel for the petitioners referred to Circular No. 14 of 2011 dated 6th October, 2011 issued by Federal Board of Revenue. It interprets the scope of the word ‘located’ appearing in Clause 126F in order to describe as to which category of taxpayers could avail the benefit of exemption.
4. In support of his contention, Mr. Muhammad Akram Sheikh also relied upon the judgments reported in the cases of Commissioner of Income Tax Peshawar Vs. Islamic Investment Bank (2016 SCMR 816), Elahi Cotton Mills Ltd. Vs. Federation of Pakistan (PLD 1997 Supreme Court 582), Commissioner of Income Tax Legal Division Vs. Khurshid Ahmad (PLD 2016 Supreme Court 545) and Army Welfare Sugar Mills Ltd. Vs. Federation of Pakistan etc (NLR 1992 Tax 186). The other counsel representing the rest of the petitioners in CPLA Nos. 3364, 3365 and 3147-L to 3149-L of 2016, adopted the same line of arguments that were advanced by Mr. Muhammad Akram Sheikh.
5. Learned counsel for the respondents defended the reasoning given in the impugned judgment by arguing that the concession granted under Clause 126F was only intended for the taxpayers of ‘normal tax regime’ who were located in affected areas whereas businesses of all the petitioners are located in Punjab and fall within the domain of ‘final tax regime’, therefore, the benefit of exemption was rightly denied to them. He further submitted that the Circular No.14 of 2011 interpreting the scope of exemption, upon which much reliance was placed by the counsel for the petitioners, was subsequently recalled on 06.10.2011 as it did not depict the true interpretation of Clause 126F.
6. Before examining the applicability of exemption granted under Clause 126F to the case of the petitioners, two types of taxpayers are to be kept in mind. One who fall within the domain of ‘normal tax regime’, whose net profit in a tax year is determined by matching costs with the income, after taking into consideration various other factors such as allowances, deductions, depreciations, rebates, amortization etc. The applicable rate of income tax is then applied to the net profit thus arrived at to determine the tax liability of the tax year. The other type of taxpayers are of the petitioners’ kind who fall within the domain of ‘final tax regime’ by virtue of Section 153(1)(c) and 153(3) read with Section 169(b) of the Ordinance. Their income tax liability in a tax year is a certain percentage deducted from the payments which are made to them by the contract awarding entity towards the performance of the contract at a rate specified in the First Schedule to the Ordinance. The income tax that is thus deducted at source fully discharges the contractor from his income tax liability irrespective of what profits and gains he has actually made as the same are of no consideration for the purposes of determining his tax liability.
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